Politics VS. Economics in California

"Price caps" are being demanded, not because they solve the economic problem, but because such demands solve a political problem by shifting the public's attention from electricity to prices -- and shift the blame from the state's politicians to power companies and the Bush administration. Governor Davis has already hired two Democratic spinmeisters, at $30,000 a month each, to orchestrate a campaign to blame the Bush administration for California's troubles. Expertise at spinning is not cheap.

"Price gouging" is another political mantra that has been repeated again and again. The argument is that federal authorities need to impose prices based on the cost of producing electricity, in order to stop "profiteering." It all sounds good on the surface, but what does it mean?

It means that any price that the state's politicians don't like can be challenged in court, where opposing accountants, economists and lawyers can spend years arguing about what the costs were as of the time when a given amount of electricity was bought. The huge legal costs of fighting such lawsuits means that some electricity suppliers will find it easier to settle out of court than to continue to pour huge legal fees down a bottomless pit.

Politically, that is vindication. Economically, it is madness. What this says to those who supply electricity is that selling electricity to California means not only risking not getting paid or not getting paid on time, it also means a risk of losing big bucks in legal hassles even after you have been paid.

This is likely to reduce the willingness of power companies to sell California the electricity that it needs. It is also likely to increase the price they charge, since they must factor in the increased risks brought on by the demagoguery of California's politicians.

In short, if the problem to be solved is how to get more electricity, then the policies being followed are terrible. But if the problem to be solved is how to get re-elected, then these policies are ideal. It all depends on what your priorities are.